Citation: 2013 TCC 365
Date: 20131120
Docket: 2011-2521(IT)G
BETWEEN:
DANIEL CLÉROUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal from
reassessments dated May 6, 2011, made by the Minister of National Revenue (the
Minister) pursuant to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.),
as amended (the Act), with respect to the appellant’s 2002 to 2007 taxation
years.
[2]
The appeals from the
reassessments dated May 6, 2011, for the 2002, 2004, 2005, 2006 and 2007
taxation years were discontinued by the appellant on October 25, 2013.
[3]
As a result, this
appeal concerns only the 2003 taxation year and the only issue to be determined
is whether that year is statute-barred pursuant to subsection 152(4) of
the Act. The parties have agreed that, if the Court determines that the 2003
taxation year is not statute-barred, the Court shall render a judgment allowing
the appeal for the 2003 taxation year, without costs, and referring the matter
back to the Minister for reconsideration and for reassessment on the following
basis:
[translation]
1.
The appellant’s “other income” is reduced from $21,995 to
$13,415 for the 2003 taxation year in accordance with section 3 and subsection 9(1)
of the Income Tax Act.
2.
The net rental income (shareholder benefit,
personal meals) for the 2003 taxation year is reduced by $4,130.
3.
The penalties imposed on the appellant under
subsection 163(2) of the Income Tax Act for the 2003 taxation year
are cancelled.
4.
The appellant waives his right to object to and
appeal the reassessment provided for in this consent and he waives the possibility
of making an application under subsection 220(3.1) of the Income Tax
Act for the 2003 taxation year.
[4]
The transaction involved
in this appeal is that by which the appellant, while the sole shareholder and
director of Les Entreprises de construction Tremesco Inc. acquired all the
shares of 6154301 Canada Inc., then a wholly owned subsidiary of Les
Entreprises de construction Tremesco Inc., for $100 when the value of the
shares in question was at least $277,574.
[5]
The Minister assessed
the appellant pursuant to subsection 15(1) of the Act because Les Entreprises
de construction Tremesco Inc. conferred on him a taxable benefit of $277,474
which the appellant did not report in his income tax return for the 2003
taxation year.
[6]
The facts with regard to
the transaction are as follows:
(a) On March 2, 2000, Les Entreprises de construction
Tremesco Inc., a company incorporated pursuant to Part 1A of Quebec’s Companies
Act, acquired an eight-unit semi-detached building with the street numbers 15
and 17 on Daniel-Johnson Street in Hull (now Gatineau). The purchase price of
the building was $550,000.
(b) During the month of November 2003, members of the
Sauriol family from Fort-Coulonge showed interest in purchasing the building
with the street numbers 15 and 17 on Daniel-Johnson Street, but they wanted to
acquire shares in a company whose sole asset was the building they were
interested in; apparently, this was to avoid the transfer taxes.
(c) To meet the purchasers’ requirements, on November 20,
2003, Les Entreprises de construction Tremesco Inc. transferred ownership of
the building to 6154301 Canada Inc., a company incorporated on October 28,
2003, under the Canada Business Corporations Act and wholly owned
by Les Entreprises de construction Tremesco Inc. The sale was for $1 and other
good and valuable consideration, including assuming the loan granted by the
Toronto Dominion Bank in the initial amount of $467,425 and guaranteed by a hypothec
on the building. In the deed of sale giving effect to this transfer to 6154301
Canada Inc., there is no mention of a consideration in the form of shares or of
a rollover under section 85 of the Act.
(d) As the Toronto Dominion Bank refused to finance the
acquisition of shares in 6154301 Canada Inc. by members of the Sauriol family,
they acquired the building on December 3, 2003, for $745,000.00 paid on
purchase.
(e) On December 8, 2003, the appellant acquired from Les
Entreprises de construction Tremesco Inc. the 100 class A common shares of
6154301 Canada Inc. for $100 when the latter’s liquid assets were $277,574, that
is, $745,000 from the sale of the building minus the amount of the hypothec
on the building, which was $467,425.
[7]
The sale of the building
at 15 and 17 Daniel-Johnson Street, Gatineau, by 6154301 Canada Inc. to members
of the Sauriol family on December 3, 2003, was assessed by the Minister as
giving rise to unreported business income of $277,574 and not a capital gain
because that corporation’s activities were in the field of buying and selling
buildings. The penalty provided for in subsection 163(2) of the Act was
applied to the unreported income because T2 forms for the 2004 to 2006 taxation
years were only produced on October 3, 2008, following requirements for
information.
[8]
The Minister assessed
the sale of the building at 15 and 17 Daniel-Johnson Street, Gatineau, by Les
Entreprises de construction Tremesco Inc. to 6154301 Canada Inc. on November
20, 2003, as giving rise to a capital gain under paragraph 69(1)(b)
of the Act as a disposition to a related party at fair market value. The
Minister therefore assessed the company for an unreported taxable capital gain
of $97,500 and applied the penalty under subsection 163(2) of the Act.
Relevant statutory provisions
[9]
The relevant statutory
provisions in this case are paragraphs 15(1)(a) and 152(4)(a) of
the Act. These provisions read as follows:
15(1)
Benefit conferred on shareholder – If, at any
time, a benefit is conferred by a corporation on a shareholder of the
corporation, on a member of a partnership that is a shareholder of the
corporation or on a contemplated shareholder of the corporation, then the
amount or value of the benefit is to be included in computing the income of the
shareholder, member or contemplated shareholder, as the case may be, for its
taxation year that includes the time, except to the extent that the amount or
value of the benefit is deemed by section 84 to be a dividend or that the
benefit is conferred on the shareholder
(a) where the
corporation is resident in Canada at the time,
(i)
by the reduction of the paid-up capital of the
corporation,
(ii)
by the redemption, acquisition or cancellation by the
corporation of shares of its capital stock,
(iii)
on the winding-up, discontinuance or reorganization of
the corporation’s business, or
(iv)
by way of a transaction to which subsection 88(1)
or (2) applies;
152(4)
Assessment and reassessment [limitation period] – The Minister may at any time make an assessment, reassessment or
additional assessment of tax for a taxation year, interest or penalties, if
any, payable under this Part by a taxpayer or notify in writing any person by
whom a return of income for a taxation year has been filed that no tax is
payable for the year, except that an assessment, reassessment or additional assessment may be made after
the taxpayer’s normal reassessment period in respect of the year only if
(a)
the taxpayer or person filing the return
(i)
has made any misrepresentation that is attributable to
neglect, carelessness or wilful default or has committed any fraud in filing
the return or in supplying any information under this Act, or
(ii)
has filed with the Minister a waiver in prescribed form
within the normal reassessment period for the taxpayer in respect of the year.
Analysis and conclusion
[10]
According to counsel
for the appellant, the appellant did not make a misrepresentation that is
attributable to neglect, carelessness or wilful default by not reporting the
value of the benefit he received from Les Entreprises de construction Tremesco
Inc., for the following reasons:
(a) The law is not clear; counsel said that she could
not find any case law in which section 15 of the Act was used to find that a
taxable benefit was received on the sale by a company of shares of a subsidiary
to one of the company’s shareholders.
(b) The appellant did not personally have access to
the funds held by 6154301 Canada Inc., aside from a director’s bonus of $21,750.
(c) The appellant will have to pay taxes on the profit
he will earn upon resale of the shares.
(d) The value of the shares in 6154301 Canada Inc., as
determined by the Minister, does not take into consideration the underlying
taxes that are payable by 6154301 Canada Inc. following the sale of the building
to members of the Sauriol family.
[11]
According to counsel
for the respondent, the appellant was negligent in not reporting the value of
the benefit he obtained from Les Entreprises en construction Tremesco Inc. The
appellant is an experienced businessman who has carried out many real estate
development projects through corporations, and he has personal knowledge of all
the transactions involving the building at 15 and 17 Daniel-Johnson Street in Gatineau. The appellant knew or should have known that is it not possible to appropriate
property of a company for consideration less than the property’s fair market value.
[12]
In my opinion,
subsection 15(1) of the Act applies to the transaction by which Les Entreprises
de construction Tremesco Inc. sold the shares of its subsidiary to the
appellant for $100, an amount well below their fair market value at the time of
the sale. Les Entreprises de construction Tremesco Inc. clearly conferred a
benefit on its shareholder through the sale of these shares.
[13]
Contrary to counsel for
the appellant’s contention at the hearing, there is at least one case involving
a sale of shares that was considered as conferring a shareholder benefit. It is
the decision by the Tax Review Board in No. 513 v. M.N.R., 58 DTC 301. In
that case, the appellant and his brother were the sole shareholders of company G,
which, in 1941, had acquired from the appellant and related persons 458 shares
in company X, a private corporation, for $151 per share. A few years later, in
1953, G required funds to finance its expansion projects. To obtain additional
funds, G sold the 458 shares in X to the appellant for the same price as it had
paid, $151 per share, which the appellant believed was the fair market value of
the shares at that time. The Minister did not agree with that valuation and
believed the value of the shares in 1953 was actually $220 per share. The
Minister then assessed the appellant for a shareholder benefit of $31,000. In No.
513, the existence of a shareholder benefit was not challenged, since the purpose
of the proceeding was to determine the value of the 458 shares that were the
object of the transaction.
[14]
In the present case as
well, the question of the value of the benefit arises because the Minister did
not take into account the underlying taxes payable by 6154301 Canada Inc. following
the sale of the building to members of the Sauriol family. Regardless of what
the actual value of the benefit conferred on him might be, the appellant did
not report anything in his 2003 tax return. In fact, 6154301 Canada Inc. never
paid the taxes resulting from the sale of the building because it was dissolved
on January 11, 2007, two and a half years before it was assessed for that
transaction on August 26, 2009.
[15]
Counsel for the
appellant’s argument that subsection 15(1) of the Act cannot apply in this
case because the appellant did not personally have access to the funds held by 6154301
Canada Inc. does not alter the fact that the appellant received a benefit from Les
Entreprises de construction Tremesco Inc. Access to the funds is not a condition
for the application of subsection 15(1) of the Act. Be that as it may, I
believe that the appellant did have access to 6154301 Canada Inc.’s funds since
he received a $21,750 bonus as the company’s director, had advances totalling
$14,999 made to him, and had a $192,000 loan made to 6210929 Canada Inc., another
company of which he was a shareholder.
[16]
The other argument by
counsel for the appellant, namely that subsection 15(1) of the Act should
not apply to the transaction because the appellant will have to pay taxes on
the gain he will realize on the resale of the shares, is not valid since
subsection 52(1) of the Act allows an increase in the cost of property (in
this case, the shares in 6154301 Canada Inc.) where the taxpayer, in computing
the taxpayer’s income for a taxation year throughout which the taxpayer was resident
in Canada, must add an amount in respect of the value of the property other
than under section 7 of the Act. On application of subsection 15(1) of the
Act, the appellant’s adjusted cost base of the shares in 6154301 Canada Inc. was
increased by the amount in respect of the value of the property that was included
in computing his income for 2003.
[17]
With regard to the
application of subparagraph 152(4)(a)(i) of the Act, it is worth
reproducing the following comment, made by Strayer J. in Venne v. Canada,
[1984] F.C.J. No. 314 (Federal Court, Trial Division), concerning the degree of
negligence required in order for the Minister to be able to make a reassessment
after the normal reassessment period:
I am satisfied that it is sufficient for the Minister, in order to
invoke the power under sub-paragraph 152(4)(a)(i) of the Act to show that, with
respect to any one or more aspects of his income tax return for a given year, a
taxpayer has been negligent. Such negligence is established if it is shown that
the taxpayer has not exercised reasonable care. This is surely what the words “misrepresentation
that is attributable to neglect” must mean, particularly when combined with
other grounds such as “carelessness” or “wilful default” which refer to a
higher degree of negligence or to intentional misconduct. Unless these words
are superfluous in the section, which I am not able to assume, the term “neglect”
involves a lesser standard of deficiency akin to that used in other fields of
law such as the law of tort. See Jet Metal Products Limited v. The Minister of
National Revenue (1979) 79 DTC 624 at 636-37 (T.R.B.).
[18]
In other words, the
Minister merely has to show simple negligence on the part of the taxpayer in
order for subparagraph 152(4)(a)(i) of the Act to be applicable.
[19]
In the present appeal,
I agree with counsel for the respondent that the appellant showed negligence by
not reporting the value of the benefit he obtained on the acquisition of the
shares in 6154301 Canada Inc. Considering his real estate experience and his
knowledge of all the transactions involving the building on Daniel-Johnson
Street, the appellant knew or ought to have known that it is not possible to appropriate
a company’s property for consideration less than its fair market value.
[20]
For these reasons, I consider
the Minister to have been justified in assessing the appellant’s 2003 taxation
year after the expiry of the reassessment period. Accordingly, the appeal from
the reassessment dated May 6, 2011, for the appellant’s 2003 taxation year is
allowed, without costs, and the matter is referred back to the Minister for
reconsideration and reassessment based on the consent to judgment dated October
25, 2013, filed with the Court at the beginning of the hearing.
Signed at Ottawa, Canada, this 20th day of November 2013.
“Réal Favreau”
Translation certified true
on this 27th day of February 2014.
Erich Klein, Revisor
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